Freelancers face £208.5K pension shortfall

Self-employment in the UK has risen drastically over the last 25 years, fueled by both economic shifts and changing attitudes towards work.

In more recent times, the impact of the COVID-19 pandemic has led to a challenging economic climate, including a multitude of workplace redundancies. As a result, a large number of startups cite job loss as a motivator for starting a business.

Meanwhile, others are drawn to self-employment simply for greater control over how and when they work.

But the freedom and flexibility of freelance life comes with a cost. According to research from financial services company Funding Circle, that’s falling behind in pension savings, which has led to a gap of £208,500 between self-employed individuals and employees.

While employees benefit from employer contributions and automatic enrollment into workplace pensions, freelancers are largely left to navigate retirement savings on their own — a challenge that many are struggling to keep up with. 

The pension divide between employees and freelancers

Being your own boss has plenty of perks, but when it comes to long-term money plans — particularly pensions — many freelancers are falling behind. 

In 2023-2024, sole traders contributed £2.7bn to private pensions — an increase from £2.3bn the previous year.

However, as just 20% of freelancers are paying into pensions, Funding Circle reveals that the average pension pot for self-employed workers is just £50,700 — a stark difference compared to £318,000 for employees.

As a result, self-employed individuals are likely to retire with £10,000-£11,000 less than their target income, even after receiving the full State Pension, leading to a £208,500 pension deficit overall. 

“The 4 million self-employed workers in the UK are the backbone of our economy, yet they’re most at risk of being left behind when it comes to saving for retirement.” James Shafe, Group Policy Director at Monzo, told the Social Market Foundation.

Why do the self-employed save less?

For many freelancers, saving for retirement can feel like a constant balancing act. 

According to IPSE, 34% of freelancers say other financial priorities stop them from contributing to a pension. This was followed by affordability and stopping contributions to their previous pension scheme after becoming self-employed (24%).

However, Funding Circle also points to factors like no automatic enrollment, irregular income and cash flow pressures as common reasons why many freelancers struggle to consistently contribute to a pension. 

Shafe adds that lack of understanding and tailored self-employed pension offerings have also been key barriers.

Meanwhile, John Asthana, researcher at Social Market Foundation, has called on the UK government to further support freelancers struggling to save for retirement.

“It’s simply untenable for the government to continue to overlook this problem.” Asthana says.

“We should build on the success of auto-enrolment for employees and ensure that people in this crucial but often forgotten part of the labour force are encouraged to sufficiently save for their retirement.”

How should freelancers secure pensions?

For freelancers, contributing to a pension is essential for long-term financial security and independence later in life. 

Unlike employees, you don’t benefit from automatic enrollment or employer contributions, meaning you need to take control of your own retirement planning.

Setting up a personal pension or a Self-Invested Personal Pension (SIPP) allows you to contribute regularly and choose how your money is invested. Those with previous workplace pensions can also continue contributing to their old schemes and compile previous pensions into one pot, so that your savings keep growing.

Other options include stakeholder pensions and Lifetime ISAs (LISAs). Stakeholder pensions are low-cost, flexible pension plans with capped maximum charges of 1.5% for the first 10 years, and then 1% after that. Contributions can also be adjusted or paused if income becomes irregular, which is ideal for freelancers.

Meanwhile, LISAs allow individuals under 40 to save up to £4,000 a year and receive a 25% government bonus. After you turn 60, the funds can be withdrawn for retirement — giving you an additional safety net alongside a pension.

By utilising these options and contributing consistently, freelancers can quickly take charge of their retirement, build financial independence, and ensure a more secure future.